War spending will suck the economy dry for years to come

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Selective Thinking

By Dean Baker

October 29, 2007, The Guardian Unlimited

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Both the annual and total cost of the wars in Iraq and Afghanistan are growing rapidly. President Bush has requested $190 billion, approximately 1.3 percent of GDP, to finance the wars in 2008, which would bring the total cost by the end of the year to more than $800 billion. Opponents of the war have highlighted the budgetary impact of this spending. For example, advocates of increased spending on the State Children’s Health Insurance Program pointed out that the sum in dispute between President Bush and Congress is less than two weeks of war funding at the 2008 rate. However, there has been almost no public discussion of the economic impact of war spending.

This is striking because standard economic models project that such a large increase in military spending would slow economic growth and reduce the number of jobs. The basic story is that military spending pulls resources away from economically productive uses such as investment and consumption. This is readily apparent when a war is paid for with a tax increase, in which case the money is directly sucked out of people’s pockets.

However, the war must be paid for even if we don’t raise taxes. In most economic models, the resources to pay for the war in the absence of a tax increase come through an indirect route. War related spending raises interest rates. This in turn crowds out business investment and housing construction. Higher interest rates also lead to a higher value of the dollar, which raises the trade deficit. The reduction in investment, housing construction, and net exports, and the resulting loss of jobs, free up the resources needed to pay for the war.

The Center for Economic and Policy Research asked Global Insight, one of the country’s largest economic forecasting firms, to model the impact of war related spending on the economy. Their model showed that after initially providing a stimulus to the economy, the effect of war related spending turned negative by the sixth year, and gets increasingly negative through time.

By the tenth year, higher military spending was projected to have reduced employment by 470,000 jobs, largely due to declines in car production, housing construction, and an increase in the trade deficit. The model projected that construction employment would be 140,000 lower and manufacturing employment 95,000 lower because the of the impact of higher military spending. The cumulative trade deficit over the first decade is projected to be more than $700 billion higher as a result of spending on the war.

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http://www.cepr.net/content/view/1338/45/